Q = T x E / 100

September 16, 2011

Mainstream economics isn’t much more than a bunch of complex mathematical models built on top of absurdly unrealistic assumptions. It’s the main reason the profession’s been exposed as irrelevant in this and all past crises. The sad reality though, is that one will not be taken seriously in matters economic unless the argument can be reduced to a mathematical formula. In that spirit, here’s an equation that summarizes the essential argument of almost all my posts on this blog.

Q = T x E/100

Q is the quality of life of the population; T is the technological capacity of the civilization to achieve high standards of living using a scale of 1 for the lowest technological level to 100 for the highest; and E is a measure of equality from 1 (completely unequal) to 100 (full equality).

Using this equation, the maximum quality of life would be 100 if the technology was rated 100 and it was equally shared by all. The lowest would approach 0.

There can be no doubt our technology is extremely high today and in matters important to qualities of life, it probably approaches 100. One could argue it’s more like 90 or so but it’s really rather immaterial as we’ll see.

It’s also obvious, given the massive levels of inequality, unemployment, and insecurity which exist in every country of the world that the E measure is very low. Perhaps it’s 1 or at most maybe 10. Again, the exact level doesn’t change the conclusion.

Being conservative, let’s assume T=90 and E=10 and see what we get. Q = 90 x 10/100 = 9. Our quality of life could be 90 based on our technology but it ends up being only 9. One can play with the input assumptions but any that come close to the real world would demonstrate an outrageous disconnect between possibility and reality.

Many economists, so ever predictably, will argue that greater equality diminishes the quality of life for the rich and therefore isn’t “Pareto optimal”. This argument is extremely weak and one way to attack it is to use the much cited classical economic idea of marginal utility. The marginal utility idea is that the incremental value of any commodity declines as its quantity increases. While normally applied only to specific goods or labor, there’s no basis not to apply it to wealth in general. We all know that the marginal utility of each extra quantity of income is not quite as valuable as the preceding and the marginal utility theory therefore demonstrates that the highest utility is achieved with full equality.

Another standard economic argument is that inequality of income is needed to spur effort and creativity. This theory of human motivation, though, is completely contradicted by all research in psychology and anthropology. It’s false and has no basis. Money is not a prime motivator.

What conclusions can we derive from the formula? We can conclude that capitalism as we know it is grossly inefficient if our goal is quality of life. We can also conclude that efforts to improve the standard of living must be entirely focused on the E side of the formula rather than T. An incremental improvement in technology will do almost nothing to the quality of life and all efforts must therefore be put on increasing the level of equality. Standard economic arguments that focus on T are exposed as frauds.

We need to be creative in the ways we choose to increase equality. The standard idea is progressive taxation and re-distribution of market determined incomes. That’s a good start but by itself won’t get us to the quality of life we seek. The motivations of the largest corporations need to be changed so that their productive potential is put at the service of everyone. The private profit motive needs to be severely curtailed and replaced by motives that increase the quality of life of all. That’s not as outlandish as many would think since production today is so incredibly concentrated. Just 500 corporations control 40% of global revenue and these titans are “owned” by absentee stock holders having no knowledge of the underlying businesses and who contribute nothing other than their speculative funds. These companies are ripe targets for tight regulation or public ownership.

The illogic of our global financial system also needs to be completely reworked and replaced by a system that recognizes the potential of fiat currencies utilizing the fundamental insights of Functional Finance / Modern Monetary Theory. Today’s financial system is owned and operated by the forces of inequality and its primary logics of deficit control, high interest rates, unemployment, and austerity need to be wiped off the face of the earth. (I reject, though, the full employment ideas of some of the key MMT economists as they are distracting from what our real goal should be and fall far short of our quality of life potential.) All ideas should be judged on how close they match reality with our potential.

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“I reject, though, the full employment ideas of some of the key MMT economists as they are distracting from what our real goal should be and fall far short of our quality of life potential.”

The specific policy recommendations of to achieve full employment are not integral to the theory. MMT is comprised of 1) an operational description of monetary system, specifically the modern monetary system operative today, 2, a macroeconomic theory chiefly using stock flow consistent modeling of national accounts and the sectoral balance approached developed by Wynne Godley, functional finance developed by Abba Lerner, and the insights of Hyman Minsky on financial instability, and 3) policy options based on 1 and 2. Different MMT proponents propose various policy options.

Jim, I am wondering how you would approach the policy options. Perhaps you might do a post on that.

You are probably aware that Beowulf and Joe Firestone have various proposals out there, such as the platinum coin gambit and a sliding Tobin tax on fed funds. Beowulf has also suggested previous proposals by economists such as Bill Vickrey, David Colander and Abba Lerner that are applicable. Even Milton Friedman had a negative income tax proposal instead a job guarantee. So there are many alternative policy proposals to debate already. Adding to the pile increases the options.

Cutting the work week I think is a very good idea. It would provide greater leisure time which the logic of capitalism is not capable of providing and would spread purchasing power to the currently unemployed. One could argue it wouldn’t be inflationary either since there’s an excess of capacity which is always increasing. I’m not sure, though, to what degree it would increase equality since the share going to the top could, I’d think, remain stable. Bottom line effect: reduce unemployment, increase leisure, increase overall demand, increase profits.

Smallish monthly stipend sounds good. But I think I’d argue for a more biggish stipend.

Finally, your ideas seem to accept the existing distribution of ownership of the means of production and the financial system. Do you think of your proposal as just a first step toward a more radical transformation or that it would get us a good way to where we should be?

Also, I don’t think that any of us know what the “right” solution looks like. Problems not apparent at the current time might become obvious under a new system. I like incremental change because it allows people to make corrections as they go. Whether I accept the existing distribution of means of production and financial system is immaterial. You have to understand that the VAST majority of people do accept it, as least to some degree. So, to me, the issue is to find ways to change the current system in ways that will be acceptable to the masses.

There are lots and lots of other things you can do that could lead to a society more like the one you envision without totally freaking people out by destroying everything they know. I have come to realize that while I am very comfortable with change, most aren’t. Most like consistency in their lives. They would rather put up with stable mediocrity than experiment with change, even if that change might create a superior life for most. Humans are fearful beings.

“I reject, though, the full employment ideas of some of the key MMT economists as they are distracting from what our real goal should be and fall far short of our quality of life potential.”

I strongly disagree. While it is true that the policy recommendations are not strictly part of the theory, the theory + ordinary, universal human morality essentially dictate a JG in one form or another – especially in light of historical experience and human nature. The idea of a monetary economy without some kind of Job Guarantee is insane. (“Logically absurd” – Mosler)

The JG is far more integral to MMT & rightly is more strongly advocated by the key MMT economists – and many allied thinkers – than say a ZIRP, which seems to hypnotize many MMTers. Interest rates, printing bonds vs. printing currency simply does not matter very much, and is of microscopic importance compared to high full employment.

Of course the wage & hours necessary to work for making a basic living should be appropriate to the wealth of the economy. IMHO in the USA the wage should be such as to lower the necessary workweek. But who is anyone to say that no, you can’t get ahead, you can’t work more? (Beyond reasonable natural, biological limits.) No matter how well designed the other government programs are, which imho should include a universal stipend too, there will always be human needs and wants not met by them. The JG should be about putting the individual in the saddle, not the government.

Andrew: Also, I don’t think that any of us know what the “right” solution looks like. FDR, the USA in the early 40s say was pretty close. Full employment, a WPA JG, Social Security, high infrastructure spending, low rates for investors, high rates for individuals, a highly and intelligently regulated financial system, government support of uh, natural government functions, like the Post Office, education, power generation, scientific research etc. Widespread understanding of economics not only in the general population, but even in academia. Socialized medicine was one major missing thing, but planned for, among other missing pieces, by FDR.

Or take Pre 70s/80s& onward underspending-insanity European Social Democracy. Symbolized say by Bruno Kreisky or de Gaulle. I think history tells us pretty clearly who was the real lefty in 1968 – De Gaulle, not Red Danny, now a supporter of neoliberal quackonomics.

All that was necessary really was to stay on this course. To adopt say Nixon’s 1972? program posted by Beowulf. By now we would have space elevators and Stargate Atlantis floating cities, and a lot more. Instead, while the slowing but unstoppable progress of science and technology caused many micro-improvements, they were (perhaps more than) offset by the systematic destruction of profoundly intelligent macro-institutions, practices and knowledge and their replacement by parasitical, do-nothing, make-work, welfare-for-the-rich sectors. It took real, systematic and difficult work to make the USA as poor and unjust as it is today in comparison to what it was, could have and should have been.

Well, the FDR system had many advantages over the current, but my point was more general, in that we don’t always know the impact of the changes that we make. Making changes incrementally allows one to modify and adjust.

Take, for example, the idea of improved infrastructure. This sounds laudable. People like shiny new things. But what if we incentivized work closer to home? Would this perhaps eliminate the need for more infrastructure and reduce the use of resources that may become scarce? The solutions of yesterday don’t always make sense for today. Taking small steps and experimenting seem reasonable ways to approach change — provided the political system has enough durability to allow such steps.

P.S. – I think many would argue that mentioning the post office isn’t particularly supportive of your point.

I agree with much of what you wrote. My problem with the JG programs I’ve seen from MMTers is that they seem to lock in the commodity nature of labor at a minimum wage or something around that level. While better than the outrageous system we have today, it still, I think, tends to force us into lower living standards than we’re technically capable of achieving. Far lower.

A system that guaranteed everyone a quality living standard and was coupled with some form of guaranteed work would be very supportable, especially as you mention if it were coupled with a stipend, increased leisure, and based on our technological capacity. It’s right down the lines of what I support. But the MMT JG ideas I’ve read – (say from L. Randall Wray) – sound far too economistic to me. They’re based on a minimum wage, don’t address equality, don’t propose a mechanism to move us toward utilizing our technology to benefit the wider public rather than simply what’s “profitable”, and accept the extreme concentration of corporate power (i.e. 500 companies controlling 40% of global revenue), to name just a few exceptions.

Per Wray (http://www.cfeps.org/pubs/wp-pdf/WP9-Wray.pdf), the wage of his Employer of Last Resort program would be set to that of “relatively unskilled labor”. Short term, better than starvation, but I don’t accept that skilled labor should live a better life than unskilled and certainly don’t accept that anyone should live at incomes vastly below our technological potential. I see no moral basis for it, and Wray’s plan accepts it. He proposes the wage rate be set at $6.25 an hour (written in 2000). The idea is that employment at this rate would be available whenever private demand for labor drops. Such an hourly rate is obviously grossly below the quality of life permitted by our technology. Are we to accept that a significant proportion of the population should live this way? And how about those who enjoy a higher private wage and then lose their jobs? Will they be kicked out of their homes and lose everything when their incomes drop?

I’m going to do a post at some point on this subject but programs such as these cannot be anything other than a brief and temporary band aid. And they could actually pose a real danger if a vast pool of minimum wage jobs becomes acceptable and therefore perpetuates the capitalist system with its great inequality and absurd under-performance compared to technological capacity. Our technology is moving steadily toward a near workless world yet these JG ideas perpetuate the law that income is tied to work. Some form of socialism is clearly the answer and ideas for perpetuating capitalism with minimum wage supplements can’t possibly be (I hope) the future of mankind.

Perhaps the JG program you’re thinking of is vastly different than Wray’s?

I think Wray is being pragmatic. The job guarantee suggestion is something that people can wrap their heads around as being better than, say, unemployment payments. I know where you are coming from and I agree, but until the pitchforks come out, a job guarantee may be the best positive step that one can reasonably expect.

I agree that the JG is not the final solution, and I doubt that any of the MMT economists thinks it is either. The proposal is aimed at replacing the present buffer of unemployed with a buffer of employed, for a variety of reasons, some humanitarian and some economic. It is not only the right thing to do (effective at achieving public purpose) but it is doing the right thing (economically efficient in that it utilizes otherwise idle resources). This is a practical step that could be taken immediately in conjunction with other MMT proposals in order to deliver full employment with price stability.

I don’t think that any MMT economist thinks that this is the end of the road in economic development. Given technological innovation and more equal distribution, it is possible to enjoy greater prosperity and more leisure as a human family. This should be the overall goal, which will involve an evolution of thinking, social, political and economic. Forward looking thinkers have been working in this direction for a long time already, but it would require radical institutional change to implement.

The present policy proposal is just a vast improvement over the present situation, not only in the developed world but also in the developing world, which it is already being applied with success due to the recommendations of MMT economists — and it is a proposal that could reasonably be enacted politically. I look at it as a first step rather than the goal.

We certainly share the same goals as do I’m sure the MMT economists with JG proposals. I do think there are real risks to pushing these proposals though. It institutionalizes the idea of minimum wage work which has a distinct possibility of bringing in a permanent under-class (of course we already have one). The direction our technology is headed is undeniably toward less need for work and so we should expect the JG workforce to only increase.

Not only can it actually turn out to be a step backward, I think it distracts the attention of the many progressives who know about MMT. MMT has huge progressive implications – guaranteed quality living standards for all should be our goal and I think we need to think far more broadly than simply providing minimum wage jobs to the unemployed. Capitalism is crashing everywhere, isn’t it time to be a bit more visionary?

Capitalism is crashing everywhere, isn’t it time to be a bit more visionary?

Capitalism has already changed considerably since the days of Marx, for example. Read the Manifesto and see how much has already been done. Historically, change has come incrementally as well as suddenly, in tectonic shifts. I’m for incremental change that is beneficial for the masses, while at the same time looking forward toward tectonic change, too, on a global scale.

However, my own life has been one of not waiting around or change but cooperating with people having a similar vision of living the future now. This is what creative independent people have always done. It is entirely possible for those who are creative enough to beat their own path and brave enough to risk the consequences of failure. It is based upon such experiments that new visions will be actualized from the bottom.

But not everyone can do this, and those people ought at least to have access to a better life than they have now.